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HomeMy WebLinkAboutR2007-028FILEREFERENCEFORM R2007-028 Additional FileExists Additional FileContains Records NotPublic, According tothePublic Records Act Other FILE(S) Date Initials JRAmendedbyResolutionNo. R2008-009 03/04/08 JRAmendedbyResolutionNo. R2009-006 03/03/09 JRAmendedbyResolutionNo. R2009-028 11/03/09 S.\Our Documents\Resolutions\07\Invcstment Policy.doc RESOLUTION NO. o~~D~"O A RESOLUTION REVIEWING AND ADOPTING THE INVESTMENT POLICY FOR FUNDS FOR THE CITY OF DENTON; DESIGNATING AN INVESTMENT OFFICER;PROVIDING A SAVINGS AND A REPEALING CLAUSE; AND PROVIDING AN EFFECTIVE DATE. WHEREAS, the City Council passed Resolution No. 96-061 on October 15, 1996, which adopted an Investment Policy for Funds for the City, in compliance with the Public Funds Investment Act, 74th Leg., ch. 402, 1995 Tex. Sess. Law Serv. 2958 (Vernon) (TEX. GOVT CODE Ann. Ch. 2256); and WHEREAS, by Resolution No. 97-026, passed by the City Council on June 10, 1997, the City's Investment Policy was amended; and WHEREAS, by Resolution No. 97-077, passed by the City Council on December 16, 1997, the City's Investment Po]icy was amended; and WHEREAS, by Resolution No. 98-067, passed by the City Council on December 15, 1998, the City's Investment Policy was reviewed and adopted; and WHEREAS, by Resolution No. 99-047, passed by the City Council on September 21, 1999, the City's Investment Policy was amended; and WHEREAS, by Resolution No. 2000-065, passed by the City Council on December 19, 2000, the City's Investment Policy was amended; and WHEREAS, by Resolution No. 2001-072, passed by the City Council on December 18,- 2001, the City's Investment Policy was amended; and WHEREAS, by Resolution No. 2002-055, passed by the City Council on December 10, 2002, the City's Investment Policy was amended; and WHEREAS, by Resolution No. 2004-008, passed by the City Council on February 3, 2004, the City's Investment Policy was amended; and WHEREAS, by Resolution No. 2005-008, passed by the City Council on February 22, 2005, the City's Investment Policy was amended; and WHEREAS, by Resolution No. 2005-047, passed by the City Council on November 15, 2005, the City's Investment Policy was amended; and WHEREAS, the City Council desires to review the Investment Policy for compliance to the Public Funds Investment Act, TEX. GOVT CODE ch. 2256, by the 80th Legislature; NOW, THEREFORE, s:\our dowmen[s\resolu[ions\07\inves[ment policy.doc THE COUNCIL OF THE CITY OF DENTON HEREBY RESOLVES: SECTION 1. The City Council has reviewed the attached City of Denton Investment Policy, which contains the City's investment`policies and investment strategies for each of the fimds under its control and hereby adopts the attached Investment Policy, which is made a part of this Resolution for all purposes. SECTION 2. The Assistant City Manager, Jon Fortune, and the Director of Finance, Bryan Langley, are hereby designated as the City's Investment Officers to perform the functions required of them. The Investment Officers are hereby authorized to perform the functions required of them under the Investment Policy and in accordance with TEX. GOVT CODE ch. 2256 (Code) and shall complete the investment training required in accordance with the Code. SECTION 3. All resolutions or parts of resolutions in force when the provisions of this resolution became effective which are inconsistent or in conflict with the terms or provisions contained in this resolution are hereby repealed to the extent of any such conflict only. The non- conflicting sections, sentences, paragraphs, and phrases shall remain in full force and effect. SECTION 4. Save and except ast amended hereby, all the provisions, sections, subsections, paragraphs, sentences, clauses, and phrases of Resolution No. 96-061, Resolution No. 97-026, Resolution No. 97-077, Resolution No. 98-067, Resolution No. 99-047, Resolution No. 2000-065, Resolution No. 2001-072, Resolution No. 2002-055, Resolution No. 2004-008;., Resolution No. 2005-008, and Resolution No. 2005-047 shall rerriain in full force and effect. SECTION 5. This Resolution shall become effective immediately upon its passage and approval. PASSED AND APPROVED this the o~.J ~~ day of , 2007. vi Y . McNEILL, MAYOR ATTEST: JENNIFER WALTERS, CITY SECRETARY: APPROVED AS TO LEGAL EDWIN M. SNYI)I/$, CITY BY: Page 2 of 2 CITY OF DENTON Page , ~f t POLICY/ADMINISTRATIVF. PRnCFDrtRF/Annrrtvrrrue~rrvF nrncr~rrvc SECTION: FINANCE POLICIES REFERL'NCE NUMBER: 403.06 SUBIECT: INVESTMENTS INITIAL EFFECTIVE DATF,: 02/!7/87 LAST' REVISION DATE: TITLE: INVESTMENT POLICY 2/05 PURPOSE This policy shall provide the guidelines by which the City of Denton "City" will maintain the minimum amount of cash in its bank accounts to meet daily needs, and to provide protection For its principal and liquidity while receiving [he highest yield possible from investing all temporary excess cash. This policy serves [o satisfy the statutory requirements of defining and adopting a formal investment policy. The policy and strategy shall be reviewed annually by the Investment Committee and City Council who will formally approve any modifications. This investment policy, as approved, is in compliance with the provisions of [he Public Funds Investment Act of Tex. Gov't. Code Ann. Chapter 2256, hereinafter referred to as the "Act", as amended and effective September 1, 1997. 1[. SCOPE A. This Investment Policy applies to [he investment activities of the City oC Denton, Texas. The speciftc funds cited hereafter in Section IIB, shall be excluded from this Investment Policy. All financial assets of all funds, including the General Fund and any other accounts of the City not specifically excluded in these policy guidelines are included. These funds are accounted for in the City's Comprehensive Annual Financial Report (CAFR).] These funds, as well as funds that may be created from time-[o-time, shall be administered in accordance with the provisions of these policies. All funds will be pooled for investment purposes. The strategy developed for this pooled fund group will address the varying needs, goals, and objectives of each fund. B. This policy shall not govern funds, which are managed under separate investment programs in accordance with Section 2256.004 of the Act. Such funds currently include; Employees' Retirement Fund of the City of Denton; the Firemen's and Policemen's Pension Funds of the City of Denton; other funds established by the City for deferred employee compensation; revenue bond reserve funds: and certain private donations. The Ciry shall and will maintain responsibility for these funds to the extent required by: Federal and Stale Law; the CiryCharter; and donor stipulations. III. INVESTMENT OBJECTIVE & STRATEGY It is the policy of the "City" that, giving due regard to the safety and risk of investment, all available Cunds shall be invested in conformance with State and Federal Regulations, applicable Bond Resolution requirements, adopted Investment Policy and adopted Investment Strategy. In accordance with the Public Funds Investment Act, the following prioritized objectives (in order of importance i^ accordance with Section 2256.005(d) of the Act), apply for each of the City'sinvestmentstrategies: Paee 2 of I i POLICY/ADMINISTRATIVE PROCEDURE/ADMINISTRATIVE DIRECTIVE TITLE: INVESTMENT POLICY REFERENCE NUMBER: 403.06 A. S'uitobility-Understanding the suitability of the investment to the financial requirements of the City. Any investment eligible in the Investment Policy is suitable for all City funds. B. Safety -Preservation and safety of principal. All investments will be of high quality securities with no perceived default risk. Market price fluctuations will however occur, by managing the weighted average days to maturity for each fund type as specified. C. Liquidity - To enable the City to meet operating requirements that might be reasonablyanticipated, the City's invesnnen[ portfolio will remain sufficiently liquid. Liquidity shall be achieved by matching investment maturities with forecasted cash flow requirements and by investing in securities with active secondary markets. Short-term investment pools and money market mutual funds provide daily liquidity and may be utilized as a competitive yield alternative to fixed maturity investments. D. Marketability -Securities with active and efficient secondary markets are necessary in the event of an unanticipated cash requirement. Historical market "spreads" between the bid and offer prices of a pazticular sectrity type of less than a quarter of a percentage point shall define an efficient secondary market. E. Diversification -Investment maturities shall be staggered throughout the budget cycle to provide cash flow based on the anticipated needs of the City. Diversifying [he appropriate maturity structure will reduce market cycle risk. F. Yield - Attaining a competitive market yield for comparable security-types and portfolio restrictions are the desired objective. The yield of an equally weighted, rolling six-month treasury bill portfolio shall be the minimum yield objective or "benchmark". A secondary objective will be ro obtain a yield equal [o or in excess of a local government investment pool, money market mutual fund or average Federal Reserve discount rate. The first measure of success in this area will be the attainment of enough income to offset inflationary increases. Even [hough steps will be taken to obtain [his goal, the City's staff shall constantly be cognizant of the standard of care and the investment objectives pursuant to [he provisions of the amended Act, Section 2256.006(x). The Director of Finance shall avoid any transactions that might impair public confidence in the City's ability to govern effectively. The governing body recognizes that in diversifyingtheportfolio, occasional measured losses due to market volatility are inevitable, and must be considered within the context of the overall portfolio's investment return, provided that adequate diversification has been implemented. The pmdence of the investment derision shall be measured in accordance with the tests set forth in Section 2256.006(b) of the Act. IV. INVESTMENT STRATEGY FOR SPECIFIC FUND GROUPS Each major fund type has varying cash flow requirements and liquidity needs. Therefore specific strategics shall be implemented considering the fund's unique requirements and the following shall be considered separate investment strategies for each of the funds mentioned below. The City'sfundsshallbeanalyzedandinvestedaccordingtothefollowingmajorfundtypes: Pane i of I i POLICY/ADMINISTRATIVE PROCEDURE/ADMINISTRATIVE DIRECTIVE TI'T'LE: INVESTMENT POLICY REFERENCE NUMBER: 403.06 A. Opernling Frrnds -Investment strategies for operating funds and commingled pools containing operating funds have as their primary objective [o assure that anticipated cash flows are matched with adequate investment liquidity. The secondary objective is to structure a portfolio, which will minimize volatility during economic cycles. This may be accomplished by purchasing high quality, short-term securities, which will complement each other in a laddered maturity structure. A dollar weighted average maturity of 365 days or less will be maintained and calculated by using [he stated final maturity date of each security. B. Debl Sen ice Fands -Investment strategies for deb[ service funds shall have as the primary objective the assurance of investment liquidity adequate [o cover the debt service obligation on the required payment date. Securities purchased shall not have a stated final maturity date, which exceeds the deb[ service payment date. A dollar weighted average maturity of 550 days or less will be maintained and calculated by using the stated final maturity date of each security. C. Debl 5'en~ice Reserve Fnnds -Investment strategies for debt service reserve emergency and contingency funds shall have as [he primary objective [he ability [o generate a dependable revenue stream to the appropriate fund from securities with a low degree of volatility.Securities should be of high quality and, except as may be required by [he bond ordinance specific to an individual issue, of short to intermediate-term maturities with stated final maturities no[ exceeding fve (5) years. Volatility shall be further controlled through the purchase of securities carrying the highest coupon available, within the desired maturity and quality range, without paying a premium, if at all possible. Such securities will tend to hold heir value during economic cycles. A dollar weighted average maturity of 650 days or less will be maintained. C. Cons7rrrction and Special Purpose Punds -Investment strategies for construction projects or special purpose fund portfolios will have as their primary objective [o assure [hat anticipated cash flows are matched with adequate investment liquidity. These portfolios should include at (east 10% in highly liquid securities to allow for flexibility and unanticipated projectoutlays. The stated final maturity dates of securities held should not exceed [he estimated project completion date. A dollar weighted average maturity of 365 days or less will be maintained and calculated by using the stated final maturity oC each security. E. Market prices for all public fund investments will be obtained and monitored through the use oC Interactive Data Inc., an on-line data service or a similar qualified successor agency. V. INVESTMENT COMMITTEE Members -There is hereby created an Investment Committee consisting of the City Manager, Assistant City Manager, Director of Finance, Mayor, and one member of the City Council. Scope- The Investment Committee shall meet at least quarterly [o determine general strategies and to monitor results. Included in its deliberations will be such topics as: economic outlook, portfoliodiversification, maturity structure, potential risk to the City's funds, authorized brokers and dealers, and the target rate of return on the invesunent portfolio. Page 4 of l3 PULICY/ADMINISTRATIVE PROCEDURE/ADMINISTRATIVE DIRECTIVE TITLE: INVESTMENT POLICY REFERENCE NUMBER: 403.06 Procedures -The Investment Committee shall provide minutes of its meetings. Any two members of the Investment Committee may request a special meeting, and Cour members shall constitute a quorum. The Investment Committee shall establish its own roles of procedures. VI. RESPONSIBILITY AND STANDARD OF CARE A. Delegation cf;. Trnining -The management responsibility for the investment program is hereby delegated to the Assistant City Manager, who shall establish written procedures for the operation of the investment program, consistent with this investment policy. Such procedures shall include explicit delegation of authority to the individual(s) responsible for investment transactions. The primary individual who shall be involved in investment activities will be the Director of Finance. The Director of Finance may delegate the day to day activities to a responsible individual who has received the appropriate training required by state statute. The Assistant City Manager and Director of Finance are designated as the Investment Officers, pursuant to section 2256.005 subsection f of the Act. Accordingly, the investment officers shall attend at least one training session relating to their responsibilityundertheActwithin12monthsafterassumingduties. These sessions and additional investment training sessions must be completed no less often than once every two fiscal years commencing September 1, 1997 and these financial officers shall receive not less than 10 hours of instruction relating to investment responsibilities. The training must include education in investment controls, security risks, strategy risks, market risks, and compliance with the Public Funds Investment Act. The investment training session shall be provided by an independent source approved by the investment committee. For purposes of this policy, an "independent source" from which investment training shall be obtained shall include a professional organization, an institute of higher learning or any other sponsor other than a Business Organization with whom the City of Denton may engage in an investment transaction. Thus, these independent sources will be training sessions sponsored byGovernmentTreasurersOrganizationofTexas (GTOT), University of North Texas (UNT), Government Finance Officers Association of Texas (GFOAT). No persons may engage in investment transactions except as provided under the terms of this policy and [he procedures established by [he Assistant City Manager. The Assistant City Manager shall be responsible for all transactions undertaken, and shall establish a system of control to regulate the activities of the Director of Finance. The controls shall include a quarterly process of independent review by an individual or firm designated by [he Assistant City Manager, and an annual review by an external auditor. The reviews will provide internal control byassuringcompliancewithpoliciesandprocedures. The Assistant City Manager, Director of Finance, Mayor, City Council, Ciry Manager and other Finance employees shall be personally indemnified in the even[ of investment loss provided the Investment Policies and Guidelines are followed. B. Conflicts ofLnleresl -All participants in the investment process shall seek to act responsibly as custodians of public assets. Officers and employees involved in the investment processshallrefrainFrompersonalbusinessactivity [hat could conflict with proper execution of the investment program, or which could impair their ability [o make impartial investment decisions. C. Disclosure -Anyone involved in investing City funds shall file with the Assistant CityManagerand [he Investment Committee a statement disclosing any personal business relationship and any material financial interest in a business organization that handle City of Paee 5 0( I3 POLICY/ADMINISTRATIVE PROCEDURE/ADMINISTRATIVE DIRECTIVE TITLE: INVL'STMENT POLICY REFERENCE NUMBER: 403.06 Denton investments. An investment officer has a personal business relationship with a business organization if The investment officer owns 10% or more of the voting stock or shares of the business organization or owns $5,000 or more of the fair market value of [he business organization; 2. Funds received by [he investment officer from [he business organization exceed 10% of the investment officers gross income for the prior yeaz; or 3. The investment officer has acquired from the business organization during the prior year investments with a book value of $2,500 or more for the personal account of the investment officer. Any investment officer who is related within the second degree by affinity or consanguinity as determined under the Tex. Gov't. Code Ann. Ch. 573 to an individual seeking to sell an investment to [he City shall file a statement disclosing that relationship with the City Council and the Texas Ethics Commission. D. Prudence -The standard of prudence [o be used by [he investment officials shall be [he Prudent Person Rule", as set forth in Tex. Gov't. Code Ann. Sec. 2256.006 and will be applied in the context of managing an overall portfolio: "Investments shall be made with judgement and care under circumstances then prevailing -which persons of prudence, discretion and intelligence exercise in the management of their own affairs, not for speculation, but for investment, considering the probable safety of their capital as well as the probable income to be derived." Investment officials acting in accordance with written procedures and the investment policy and exercising due diligence shall be relieved of personal responsibilities for an individual security's credit risk or market price change, provided deviations from expectations are reported in a timely fashion and appropriate action is taken to control adverse developments. F.. Reporting Qunrlerly -The Director of Finance shall prepare and present to the Investment Committee and City Council a written report on the City's investment transactions for the preceding reporting period. The report shall: 1) describe in detail the investment position of the City as ot[he end of the reporting period, 2) preparedjointly by all investment officers, 3) signed by each investment officer, 4) contain a summary statement of each pooled fund including a) beginning market value for the reporting period, b) additions and changes to the market value during the period; c) ending market value for the period; and d) fully accmed interest for the reporting period. The summary statement for each fund group must be prepared in compliance with Generally Accepted Accounting Principles (GAAP). 5) Slate the book value and market value of each separately invested asset at [he beginning and end of the reporting period by type of asset and fund type invested; 6) state the maturity date of each separately invested asset that has a ma[uriry date, 7) state the account or fund or pooled group fund for which each individual investment was acquired; and 8) state the complianceoftheinvestmentportfoliooftheCityasitrelatestotheinvestmentstrategyoftheCityand with relevant provisions of the Tex. Gov't. Code ch. 2256. Paee 6 of 13 POLICY/ADMINISTRATIVE PROCEDURE/ADMINISTRATIVE DIRECTIVE TITLE: INVESTML'NT POLICY REFERENCE NUMBER: 403.06 Annually -Within one hundred-twenty (220) days of the end of the Fiscal Yeaz, the Director of Finance shall present a comprehensive annual report to [he City Council on the investment program and investment activity. The annual report shall provide a separate quarterly comparison of returns and suggestions for improvements that might be made in the investment program. The City Council shall review and approve the investment policy and investment s[mtegies a[ least annually and be documented by rule, order, ordinance or resolution which shall include any changes made. Compliance Audit -The City's external, independent auditor will conduct an annual review of the quarterly reports in conjunction with the annual financial audit. The results of the audit will be reported to City Council upon receipt. The audit will review compliance with management control on investments and adherence to this policy. The guidelines of retaining records for seven years as recommended in [he Texas State Library M:micipal Records Manual should be followed. The Director of Finance shall oversee [he filing and/or storing of investment records. VII. SUITABLE AND AUTHORIZED INVESTMENT SECURITIES A. Active Portfolio Management -The City intends to pursue an active versus a passive investment management philosophy. That is, securities may be sold before they mature if market conditions present an opportunity for the Ciry to benefit from the trade. (Subsection E) B. Authorized Im~es(menLS (PerHB 2459 and Sections 2256.009 Through 2256.017 ofthe Act) - Assets of funds of the government of [he City of Denton may be invested in: 1. Obligations of the United States of America, its agencies and instrumentalities maturing in less than five (5) years; which have a liquid market with a readily determinable market value; 2. Investment -grade, direct obligations of the State of Texas (maturing in less than Iwo 2) years); 3. Obligations of the S[atcs, agencies thereof, Counties, Cities, and other political subdivisions of any state having been rated as investment quality by a nationally recognized investment rating firm, and having received a rating of not less than "AA" or its equivalent (maturing in Icss than two (2) years); 4. Fully insured or collateralized Certificates of Deposit issued by state and national banks or savings bank or a state or federal credit union, domiciled in Texas, guaranteed or insured by [he Federal Deposit Insurance Corporation or its successor or the National Credit Union Share Insurance Fund or its successor; secured byobligationsdescribedinIthrough3above, and that have a market value of not less than the principal amount of [he certificates but excluding those mortgage backed securities as described in the Tex. Gov't. Code Sec. 2256.009(b). (maturing in less than one (1) year); Pnor 7 r.f l Z POLICY/ADMINISTRATIVE PROCEDURE/ADMINISTRATIVE DIRECTIVE c TITLE: INVESTMENT POLICY REFERENCE NUMBER: 403.06 5. Fully collaterized direct repurchase agreements (whose underlying purchasedsecuritiesconsistoftheforegoing) with a defined termination date secured byobligationsoftheUnitedStatesoritsagenciesandinstrumentalitiespledgedwitha third party, selected and approved by the City through its Director of Finance, other than an agency for the pledgor and deposited at the time the investment is made with the City. Repurchase agreements must be purchased through a primary government securities dealer, as defined by the Federal Reserve, or a bank domiciled in Texas. Each issuer of repurchase agreements must sign a copy of the City's Master Repurchase Agreement (termination date must be 30 days or less); 6. Commercial paper that has a stated maturity of 270 days or less from the date of issuance and is rated A-I or P-1 or an equivalent rating by at least two nationallyrecognizedratingagencies. 7. a. Public Fund Investment Pools with a weighted average maturity of 90 days or less. The pool must be approved (by resolution) by the City Council to provide services to the City. The pool must be continuously rated no lower than AAA or AAA-m or at an equivalent rating by a[ least one nationally recognized ratingservice. A public funds investment pool created [o function as a money market mutual fund must mark to market daily and, stabilize at a $1 net asset value. b. To be eligible to receive funds from and invest funds on behalf of an entity under [his chapter, an investment pool must furnish to the investment officer or other authorized representative of the entity an offering circular or other similar disclosure instrument that contains, at a minimum, [he following information: 1) the types of investments in which money is allowed to be invested; 2) the maximum average dollar-weighted maturity allowed, based on the stated maturity date, of [he pool; 3) the maximum stated maturity date any investment security within the portfolio has; 4) the objectives of the pool; 5) the size of the pool; 6) the names of the members of the advisory board of the pool and the dates their terms expire; 7) the custodian bank that will safekeep the pool's assets; S) whether the intent of [hc pool is [o maintain a net asset value of one dollar and the risk of market price fluctuation; 9) whether the only source of paymem is [he assets of the pool at market value or whether there is a secondary source of payment, such as insurance or guarantees, and a description of the secondary source of payment; 10) the name and address of the independent auditor of the pool; Il) the requirements to be satis5ed for an entity to deposit funds in and withdraw funds from the pool and any deadlines or other operating policies required for the entity [o invest funds in and withdraw Cunds from the pool; and 12) the performance history of the pool, including yield, average dollar- weighted maturities, and expense ratios. Paee R of 13 POLICY/ADMINISTRATIVE PROCEDURE/ADMINISTRATIVE DIRECTIVE TITLE: INVESTMENT POLICY RNFERENCE NUMBER: 403.06 c. To maintain eligibility to receive funds from and invest funds on behalf of an entity under this chapter, an investment pool must furnish [o the investment officer or other authorized representative oCthe entity: L) investment transaction confirmations; and 2) a monthly report that contains, at a minimum, the following information: A) the types and percentage breakdown of securities in which the pool is invested; B) the current average dollar-weighted maturity, based on the stated maturities of the pool; C) the current percentage of the pool's portfolio in investments that have stated maturities of more than one year, D) the book value versus the market value of the pool's portfolio, using amortized cost valuation; E) the size of the pool; F) the number of participants in the pool; G) the custodian bank that is safekeeping the assets of the pool; H) a listing of daily transaction activity of the entity participating in the pool; I) [he yield and expense ratio of the pool; J) the portfolio managers of the pool; and K) any changes or addenda to the offering circular. 8. An SEC-registered, no load money market mutual fund which has a dollar weighted average stated maturity of 90 days or less whose assets consist exclusively of the assets described in section B.I. and whose investment objectives includes the maintenance of a stable net asset value of $I for each share: furthermore, it provides the City with a prospectus and other information required by the SEC Act of 1934 or the Investment Advisor Act of 1940 and which provides the City with a prospectus and other information required by [he Securities Exchange Act of 1934 (l5 USC. Section 78a et. Seq.) or the Investment Company Act of 1990 (15 USC Section SOa-1 e[. Seq.). 9. Other such securities or obligations which are authorized by the Act as approved by City Council upon recommendation of the Investment Committee. C. Prohibited Investments -The City's authorized investment options are more restrictive than those allowed by S[a[e law. Furthermore, this policy specifically prohibits investment in [he following investment securities. Obligations, whose payment represents the coupon payments on the outstanding principal balance of the underlying mortgage-backed security collateral and pays no principal. Obligations whose payment represents the principal stream of cash (low from the underlying mortgage-backed security collateral and bears no interest. 3. Collateralized mortgage obligations that have a stated 5nal maturity date of greaterthan10years. Pase 9 of l3 POLICY/ADMINISTRATIVE PROCEDURE/ADMINISTRATIVE DIRECTIVE TI"I'LE: INVESTMENT POLICY REFERENCE NUMBER: 403.0( 4. Collateralized mortgage obligations the interest rate of which is determined by an index that adjusts opposite to the changes in a market index. D. Diversification - It is the policy of the City to diversify its investment portfolios. The diversification will protect interest income from the volatility of interest rates and the avoidance of undue concentration of assets in a specific maturity sector; therefore, portfolio maturities shall be staggered. Securities shall also be selected and revised periodically bytheInvestmentCommittee. In establishing specifc diversification strategies, the two (2) following general po]icies and constraints shall apply: Risk of market price volatility shall be controlled through maturity diversification and by controlling unacceptable maturity extensions and a mismatch of liabilities and assets. The maturity extension will be controlled by limiting the weighted average maturity of the entire portfolio to SSO days. All long-term maturities will be intended to cover long-term liabilities. In addition, five (S%) percent of the funds in the portfolio will be liquid at all times. 2. The Investment Committee shall establish strategies and guidelines for the percentageofthetotalportfoliothatmaybeinvestedinU.S. Treasury Securities, federal agencyinstn~mentalities, repurchase agreements, and insured/collatcralized certificates of deposit and other securities or obligations. The Investment Committee shall conduct a quarterly review of these guidelines, and shall evaluate the probability of market and default risk in various investment sectors as part of its considerations. 3. Risk of principal loss in the portfolio as a whole shall be minimized by diversifying investment types according to the following limitations. Investment Tvne % ofPortfol/o U.S. Treasury NotesBills 100% U.S. Agencies & Instmmentalities 100% State of Texas Obligations & Agencies I S% Local Government Investment Pools SO% Local Government Obligations (AA)10% Repurchase Agreements ZS% Certificates of Deposit 100% U.S. Government Money Market Funds SO% U.S. Treasury Notes & U.S. Agency Callables 3S% By Institution: Repurchase Agreements No more than 10% All Other No more than 40% Investment Pools No more than $10,000,000 E. Security swaps may be considered as an investment option for the Ci[y. A swap out of one instrument into another is acceptable to increase yield, realign for disbursement dates,extend or shorten maturity dates and improve mazket sector diversification. Swaps may be initiated by brokers/dealers who are on the City's approved list. A horizon analysis is Page 10 of 13 POLICY/ADMINISTRATIVE PROCEDURE/ADMINISTRATIVE DIRECTIVE TITLE: INVESTMENT POLICY REFERENCE NUMBER: 403.0( required for each swap proving benefit to the City before the trade decision is made, which will accompany the investment f le Cor record keeping. All investments (governments or bank C.D.'S) will be solicited on a competitive basis with at leas[ three (3) institutions. The Investment Committee can approve exceptions on a case by case basis or on a general basis in the form of guidelines. These guidelines shall take into consideration the investment type mamrity date, amount, and potential dismp[iveness to the City's investment strategy. The investment will be made with the broker/dealer offering [he best yield/quality to the City. The quotes may be accepted orally, in writing, electronically, or any combination of these methods. G. Arbitrage -Due to the bond issuance sizes of which the City incurs on a regular basis, arbitrage should be addressed. The Tax Reform Act of 1986 provided limitations restricting the City's investing of tax- excmpt General Obligation Bond proceeds and deb[ service income. New arbitrage rebate provisions require that the City compute earnings on investment from each issue of bonds on an annual basis to determine if a rebate is required. To determine the Ciry's arbitrage position, the City is required to perform specific calculations relative to the actual yield earned on the investment of the funds and the yield [hat could have been earned iC the funds had been invested a[ a rate equal to the yield on the bonds sold by the City. The rebate provision states that periodically (not less than once every Gvc years, and no[ later than sixty days after maturity of the bonds), the Ciry is required to pay the U.S. Treasury a rebate of excess earnings based on the City being in a positive arbitrage position. The Tax Reform restrictions require extreme precision in [he monitoring and recording facets of investments as a whole, and particularly as they relate to yields and computations so as to insure compliance. Failure to comply can dictate that the bonds become taxable, retroactively from the date of issuance. The City's investment position relative to the new arbitrage restrictions is the continued pursuit of maximizing yield on applicable investments while insuring [he safety of capital and liquidity. It is a fiscally sound position to continue maximization of yield and rebate excess earnings, if necessary. Paee 1 I of 13 POLICY/ADMINISTRATIVE PROCEDURE/ADMINISTRATIVE DIRECTIVE TITLE: INVESTMENT POLICY REFERENCE, NUM73ER: 403.06 VIII. SELECTION OF BANKS AND DEALERS A. Depository -City Council shall, by ordinance, "select and designate one or more banking institutions as the depository for the monies and Cunds of the City" in accordance with the requirement of Tex. Loc. Gov't. Code ch. 105. The bank shall be selected primarily on solvency and stability" and secondly, on rate of interest available. The Director of Finance shall conduct a comprehensive review of prospective depositories' credit characteristics and financial history. The bank shall be selected through a formalized bidding process in response to the City's request for proposal (REP) outlining all services required. The Investment Committee shall have the discretion to determine the time span for rebidding the banking services contract; however, a two year period will be the minimum length of time between bidding with a 5 year maximum period. Banks and savings and loans associations seeking [o establish eligibility for the City's competitive certificate of deposit purchase program shall submit financial statements, evidence of Federal insurance and other information as required by the Director of Finance. B. Im~estment Brokers/Dealees -The Investment Committee shall be responsible for adopting the list of brokers and dealers of government securities. Their selection shall be among only primary governmem securities dealers that report directly to the New York Federal Reserve Bank, unless a comprehensive credit and capitalization analysis reveals that other firms are adequately financed to conduct public business. The Investment Committee shall base its evaluation of security dealers and financial instimtions upon: 1. Financial conditions, strength and capability to fulfill commitments; 2. Overall reputation with other dealers or investors; 3. Regulatory status of the dealer; 4. Background and expertise of [he individual representatives. 5. Ability to provide additional advisory services. The Director of Finance shall conduct business with securities dealers approved by the Investment Committee or with banks selected as outlined in VIIl. Furthermore, the committee must annually review this list of qualified brokers authorized to engage in investment transactions with the City. The above criterion will be evidenced by [he following indicators: delivery method for securities, capitalization of firm, lawsuits pending against firm, credit worthiness of firm, reports and research that are available, training of staff, primary versus secondary status of firm, and the presentment oC a signed qualified broker statement. Each indicator will be weighted equally in the overall evaluation. Investment Officers shall not conduct business with any firm with whom public entities have sustained losses on investments or whose name the Investment Committee has removed from an approved list. Page 12 of I3 POLICY/ADMINISTRATIVE PROCEDURE/ADMINISTRATIVE DIRECTIVE TI"fLE: INVESTMENT POLICY REFERENCE NUMBER: 403.06 C. Compliance - A qualified representative from any firm offering to engage in investment transactions with the City is required to sign a written instrument. This certifies that they have received and reviewed a written copy of [he City's Investment Policy. The firm must acknowledge that i[ has implemented reasonable procedures and controls in an effort to preclude investments between the City and the firm that are not authorized by the City's investment policy. Approved brokers and dealers must complete Exhibit A and return it to the Director of Finance. The City's investment officer(s) may not transact business from a person who has not delivered the required written inswmen[ to the City. IX. PRINCIPAL PROTECTION AND SAFEKEEPING A. All banks' and savings and loan associations' deposits and investments of City funds shall be secured by pledged collateral with a market value equal to no less than 102 percent of the principal plus accrued interest less an amount insured by FDIC or FSLIC. Evidence of proper collateralization in the form of original safekeeping receipts held in the institution's trust department or a[ a third party institution no[ affiliated with the bank or bank holding company will be maintained in [he office of [he Director of Finance all time. The Assistant City Manager, Director of Finance or other authorized City Representative will approve and release all pledged collateral. Collateral will be reviewed monthly to assure the market value of the securities pledged exceeds investments and/or the related bank balances. The Committee shall request additional collateral in the event they deem that [heir deposits and investments are not sufficiently protected by the pledged collateral. B. Safekeeping procedures shall be established by the Investment Committee, which clearly define steps for gaining access to the Collateral should the Ciry determine [ha[ the City's funds are in jeopardy. Collateral safekeeping and substitution agreements will be a pan of the procedure. C. Collateral Defined -The City of Denton shall accept only the following securities as collateral: FDIC and FSLIC insurance coverage. United States Treasuries & Agencies. 3. Other securities as approved by the Investment Committee. D. Delivery vs. Payment -All transactions will be executed with authorized security dealers and financial institutions on adelivery-versus-payment (DVP) basis. That is, funds shall not be wired or paid until verification has been made that the Trustee received the collateral. The collateral shall be held in the name of the City or held on behalf oC the City. The Trustee's records shall assure the notation of the City's ownership of or explicit claim on the securities. The original copy of all safekeeping receipts shall be delivered to the City. Securities will be held by the City's safekeeping agent, which shall be selected through a competitive process (REP) or that agent's representative in New York City, or in its account a[ [he Federal Reserve Bank. E. Subject to Audi[ -All collateral shall be subject to inspection and audit by the Director of Finance, or designee, as well as, the City's independent auditors. Page 13 of 13 OLICY/ADMINISTRATIVE PROCEDURE/ADMINISTRATIVE DIRECTIVE TITLE: INVESTMENT POLICY REFERENCE NUMBER: 403.06 X. MANAGEMENT AND INTERNAL CONTROLS The Director of Finance, or designee, shall establish a system of internal controls, which shall be reviewed by an independent auditor. The controls shall be designed to prevent losses of public funds arising from fraud, employee error, and misrepresentation by third parties, unanticipated changes in financial markets, or imprudent actions by employees or Investment OfFcers of the City. Controls and managerial emphasis deemed most important [hat shall be employed include the following: Imperative Controls: Custodian safekeeping receipts records management Avoidance ofbearer-form securities Documentation of investment bidding events Written confirmation of telephone transactions Reconcilements and comparisons of security receipts with the investment subsidiary records Compliance with investment policies Verification of all interest income and security purchase and sell computations Controls Where Practical: Control of Collusion Separation of duties Separation of transaction authority from Accounting and Record-keeping Clear delegation of authority Accurate and timely reports Validation of investment maturity decisions with supporting cash flow data Adequate training and development of Investment Officials Review of financial conditions of all brokers, dealers, and depository institutions Staying informed about mazket conditions, changes and trends that require adjustments in investment sVategies.